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STATE BANK OF PAKISTAN
August, 2016 No.78
Asif Mahmood
Muhammad Zuhair Munawar
Words Matter: A Textual Analysis of SBP’s
Monetary Policy Reviews
SBP Working Paper Series
SBP Working Paper Series
Editor: Muhammad Nadim Hanif
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Published by State Bank of Pakistan, Karachi, Pakistan.
Printed at the SBP BSC (Bank) – Printing Press, Karachi, Pakistan.
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Words Matter: A Textual Analysis of SBP’s Monetary Policy
Reviews
Asif Mahmood and Muhammad Zuhair Munawar
Monetary Policy Department, State Bank of Pakistan
Abstract
In this paper we perform a textual analysis of monetary policy statements issued during the past ten
years by State Bank of Pakistan and compare them with policy reviews of seven selected central
banks from regional, emerging and advanced economies. Broadly, we divided our analysis into three
parts. In the first part, we attempt to estimate the contribution of macroeconomic contents in the
monetary policy analysis of selected central banks. The second part deals with the decomposition of
macroeconomic contents in driving the policy decisions. In the last section, we attempt to measure the
forward-looking content in the monetary policy reviews and also their predictive power. Key findings
suggest that, across the sample, trends in inflation and developments in external sector play an
important role in driving the monetary policy stance. Also, it is found that the inflation targeting
central banks have more forward-looking content in their policy reviews than non-inflation targeters.
On the basis of empirical estimations, the former central banks are also found to be more proactive in
adjusting the policy stance to given macroeconomic conditions and their outlook.
Keywords: monetary policy, central bank, communication
JEL Classification: E52, E58
Acknowledgements
The authors are thankful to Omar Farooq Saqib, Fida Hussain, Zafar Hayat and Muhammad Abdus
Salam for their valuable comments. The authors are also grateful to the partiicpants of in-house
seminar for useful suggestions on earlier draft.
Contact for correspondence:
Asif Mahmood
Deputy Director, Monetary Policy Department
State Bank of Pakistan
I.I. Chundrigar Road
Karachi 74000, Pakistan.
Email: [email protected]
-2-
Non-technical Summary
Transparency and communication have become fundamental parts of best practices in the context of
modern central banking around the world. There has been a significant increase, as well as
improvement, in information disclosure of central banks of both advanced and emerging economies
over the last fifteen years. State Bank of Pakistan (SBP) has also gradually improved in terms of
transparency and communication, particularly in the last decade. Increased focus on economic
outlook, regular and frequent assessment of economic conditions, press conferences and speeches are
some of the key features of SBP’s improved communication framework. The monetary policy
framework and its communication have also undergone significant changes in the past decade.
In this context, we attempt to measure and compare on how different central banks tend to
communicate and disclose information, particularly through monetary policy decisions. Today, more
than 90 percent of the IMF member countries publish monetary policy statements accompanied by
policy decisions. Typically, monetary policy decisions contain assessment about current and future
economic conditions with role of monetary policy instruments in influencing these conditions.
Discussions related to economic outlook and associated risks, particularly trend in inflation and its
forecasts, are now considered as common features of these monetary policy statements/reviews.
Based on these observations, we put forward three important questions. First, what are the
macroeconomic contents of monetary policy reviews in general? Second, how these contents
contribute in the policy analysis and eventually to policy decision? And third, how much is the level
of forward-looking contents in policy reviews of each central bank in our sample and can these
contents predict future policy decisions? Using text analytic software and empirical estimations, we
applied both the quantitative and qualitative approaches on policy reviews of eight central banks from
regional, emerging and advanced economies. Our sample is based on monetary policy
statements/decisions issued during January 2006 to September 2015.
Our results showed that the contents of monetary policy analysis are largely the reflection of
particular regime adopted by the respective central bank. Also, across the sample, most of the
monetary policy decisions are found to be driven by trends in inflation and developments in external
sector. And, central banks which are following the inflation targeting regime have more forward-
looking content in their policy reviews than non-inflation targeters. The former Banks are also found
to have tendency to explain the future changes in policy rates and are more proactive to tame
inflationary pressures. In case of SBP, the monetary policy analysis and its contents have shown
gradual improvement. There is still room to improve SBP’s monetary policy analysis and
communication for better management of stakeholders’ expectations.
-3-
1. Introduction
According to Svensson (2004), “monetary policy is to a large extent the management of
expectations.” To manage expectations, however, transparency and effective communication are basic
ingredients. In modern central banking, transparency and communication have become fundamental
parts of best practices in monetary policy making. A vast amount of economic literature suggests that
there has been a significant increase (as well as improvement) in information disclosure of central
banks over the last fifteen years. The main channel through which central banks normally propagate
their transparency and effective communication is the publication of monetary policy decisions at
regular intervals.
According to Fermo (2012), 90 percent of the IMF member countries publish monetary policy
statements accompanied by policy decisions. Typically, monetary policy decisions contain assessment
about current and future economic conditions with role of monetary policy instruments in influencing
these conditions. Discussions related to economic outlook and associated risks, particularly trend in
inflation and its forecasts, are now considered common features of monetary policy reviews [Blinder
et. al. (2008)]. Indeed, after the emergence of global financial crisis of 2007-08, some of the advanced
economies’ central banks - with their already higher level of transparency - are also providing future
guidance of monetary policy changes as an important addition to their toolkit. This feature is
commonly identified as ‘forward guidance’ in the monetary policy literature.
The central banks in emerging economies, with their different economic structure, have also become
more open and transparent in the last fifteen years than they were earlier. However, their level of
transparency and communication varies depending upon the regime they follow. For instance, Geraats
(2009) showed that the central banks under inflation targeting regime have experienced more
transparency and effective communication relative to central banks with monetary and exchange rate
targeting. These differences are also reflected through their monetary policy decisions at regular
intervals [Filardo and Guinigundo (2008)].
State Bank of Pakistan (SBP) has also gradually improved in terms of transparency and
communication, particularly in the last decade. Increased focus on economic outlook, regular and
frequent assessment of economic trends, press conferences and speeches are some of the key features
of SBP’s improved communication framework. The monetary policy framework and its
communication have also undergone significant changes in the past decade while the importance of
monetary policy process has also increased in the macroeconomic policy making. Being first stake
holders, surely these developments have implications for financial market participants, particularly in
the context of predicting future monetary policy stance.
Therefore, in light of this background, we attempt to measure the monetary policy communication of
SBP - specifically through monetary policy reviews - and compare it with communication of seven
selected central banks from regional, emerging and advanced economies. Our sample is based on
monetary policy reviews issued during January 2006 to September 2015. Broadly, we put forward
three important questions. First, what are the macroeconomic contents of monetary policy reviews in
general? Second, how these contents contribute in the policy analysis and eventually to policy
decision? Third, how much is the ‘level of forward-looking contents’ in policy reviews of each central
bank in the sample and are they useful to predict future policy rate decisions?
Using text analytic software and empirical estimations, we applied both the quantitative and
qualitative approaches on policy reviews of SBP and selected central banks. The key findings show
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that overall (i) the contents of monetary policy analysis are largely the reflection of particular regime
adopted by the respective central bank, (ii) across the sample, most of the monetary policy decisions
are found to be driven by trends in inflation and developments in external sector, and (iii) central
banks which are following the inflation targeting regime have more forward-looking content in their
policy reviews and tendency to better guide the future changes in interest rates. Across the sample,
however, SBP is found to be relatively more lagging in adjusting its policy stance to give economic
situation.
The rest of the paper is organized as follows. Section 2 introduces textual analysis literature,
particularly in the context of central bank communication. Section 3 briefly describes the evolution of
monetary policy at SBP during the past decade. Section 4 presents the procedure for data collection
while section 5 discusses the methodology. Section 6 reports the findings and discussion, and section
7 concludes.
2. Textual Analysis: An Introduction in the Context of Central Bank Communication
According to American Heritage Dictionary, the textual analysis is described as “a systematic analysis
of the content rather than the structure of a communication, including the study of thematic and
symbolic elements to determine the objective or meaning of the communication.” While this kind of
analysis is very common in many fields of social sciences, particularly in political science, it is still in
a developing phase in field of economics [Bholat et. al. (2015)]. In fact, so far emerging interest in
economics is also confined to the text of economic policy makers, such as of monetary policy makers
at central banks of advanced economies.
Armesto et. al. (2009) attempted to measure the information content of Federal Reserve’s (Fed) Beige
Book using mixed data sampling approach. Their results show that the Beige Book contents help in
predicting GDP and aggregate employment. Stekler and Symington (2014) attempted to convert the
qualitative forecasts of Fed’s Federal Open Market Committee (FOMC) using quantitative scale for
period 2006-2010. Their key result indicates that the FOMC members saw the possibility of recession
in US but they were unable to predict it. Recently, Hansen and McMahon (2015) measured the impact
of FOMC statements on macroeconomic conditions. Their results indicate that financial markets are
more reactive to shocks to forward guidance than the FOMC’s discussion on current economic
conditions.1
In the context of European economies, Grimaldi (2010) attempted to identify the periods of financial
stress from the European Central Bank’s (ECB) Monthly Bulletin by using quantitative approach of
word-count for textual analysis. Apel and Grimaldi (2012) measured the tone of the minutes of the
Riksbank using the automated approach for text analysis. The latter approach helped to convert the
qualitative information in the text to quantitative measure. Their results show that the information in
the central bank minutes is useful for predicting future policy rate decisions. Similar results are also
found by Heinemann and Ulrich (2007), Jansen and De Haan (2010) and Sturm and De Haan (2011)
in case of ECB’s monetary policy communication
Unlike advanced economies, research studies to measure the information content of monetary policy
reviews of emerging market’s central banks are limited. Carvalho et. al. (2013) attempted to quantify
the information content of Central Bank of Brazil’s interest-rate setting committee (COPOM). They
tried to dissect the statements into hawkish and dovish language by using the Lucca and Trebbi (2011)
1 Amongst others, see Balke and Petersen (2002), Bligh and Hess (2010), Lucca and Trebbi (2011) and Cannon
(2015) for more analysis related to contents of FOMC’s statements.
-5-
methodology. Their results indicated the predictive power of information content for short-term
treasury yields. Similar results are found in the study by Demiralp et. al. (2011) while quantifying the
information content of Central Bank of Turkey’s policy statements.
It can be observed from the literature review that most of the studies highlighted above deals with
both the quantitative and qualitative aspects of information content found in the monetary policy
reviews. In this study - which is first of its kind in case of Pakistan - we also tried to extract both the
quantitative and qualitative side of information embedded in the monetary policy reviews of countries
in our sample.
3. Monetary Policy Evolution at SBP: A Brief Background
During the past two decades, Pakistan’s financial system has witnessed several reforms while SBP
gradually achieved more autonomy in its operations. This helped the Bank to steadily adopt the
market-based mechanism for its monetary policy implementation and transmission. Step-wise
elimination of credit rationing system, abolition of ceiling on banks’ lending rates and decrease in use
of direct monetary policy instruments are some of the important reforms that took place in the late
1990s.2 The pace of these reforms increased during the early 2000s as the role of private sector
amplified in the economy.
While the objective of SBP’s monetary policy has remained price stability and economic growth, it’s
monetary policy framework has witnessed few changes in the past two decades.3 Up till 2009, SBP
was following monetary targeting regime with pre-determined monetary program.4 Afterwards, the
focus shifted towards anchoring of inflation expectations through inflation trends and near-term
forecasts of inflation.
Certainly, regular publication of monetary policy reviews by SBP is the best document for reflection
and substantiation of aforementioned evolutionary processes over time. It is to be noted that while
SBP is regularly publishing annual (quarterly) assessments of Pakistan economy since 1949 (1999),
there had been no dedicated monetary policy statement before mid 2005. Since the former reports
essentially discuss ‘state of the economy’ (as required under the SBP Act 1956), for monetary policy
implementation, forward-looking assessment of the economy is needed. This was also important for
SBP in order to adopt best central bank practices.5
Structure and Frequency of Monetary Policy Reviews by SBP
SBP issued its first monetary policy statement in July 2005 for H1-FY06. Up till April 2016, SBP has
issued 51 monetary policy reviews. It is to note that, up till end 2008, SBP only issued bi-annual
monetary policy statements, usually in July and January each year. From January 2009, the SBP
started to disseminate the policy statements on quarterly basis. However, this pattern ended quickly in
July 2009. From September 2009 onwards, SBP announced to have six monetary policy reviews on
bi-monthly basis in each fiscal year; two comprehensive monetary policy statements in July and
January followed by four brief monetary policy decisions in alternate months.
2 For details, see Financial Sector Assessment 1990-2000.
3 According to SBP Act, 1956 (amended up to November 11, 2015), SBP is entrusted to “….regulate the monetary and credit
system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller
utilization of the country’s productive resources.” 4 Since FY10, SBP stopped issuing M2 growth targets (See SBP Annual Reports for FY09, FY10). 5 Based on IMF’s Code of Good Practices in Transparency in Monetary Policy, the anecdotal evidence suggests
that currently SBP follows around 90 percent of these codes
(https://www.imf.org/external/np/mae/mft/sup/part2.htm).
-6-
While in general the structure of brief monetary policy decisions remains intact, over time, many
changes could be observed in the structure of bi-annual comprehensive monetary policy statements.
Nevertheless, the general theme of these statements remains the same. The first section presents the
executive summary of current macroeconomic conditions and their outlook. This section has special
importance since it is carved out from the general statement with important points to be highlighted
by the governor SBP in press conferences. The second section normally deals with the assessment of
global and domestic developments occurred in the previous half or quarter of the respective fiscal
year. The third or usually the last section contains analysis about most recent economic developments
in the country along with their outlook and projections; where required.6
4. Data and Some Stylized Facts
Before discussing the methodology, as mentioned earlier, the monetary policy reviews of seven
central banks - including Reserve Bank of Australia (RBA), Bank of Canada (BoC), Reserve Bank of
India (RBI), Bank of Indonesia (BoI), Central Bank of the Republic of Turkey (CBRT), Central Bank
of Sri Lanka (CBSL) and Bangladesh Bank (BB) - are also analyzed for cross-country comparison.
Our analysis is based on monetary policy reviews issued during January 2006 to September 2015.
Selected sample of central banks provides a good mix across the monetary policy framework of
regional, emerging and advanced economies. Table 1 summarizes the key features of monetary policy
frameworks of the selected central banks.
Table 1: Selected Features of Monetary Policy Framework
as of September 2015 position
RBA BB BoI CBRT RBI BoC CBSL SBP
Monetary policy regime IT MT IT IT FIT IT MT Other**
Key policy interest rate Cash
rate
Repo
rate
BI
rate
1-week
repo rate
Repo
rate
O/N
target rate
SF
rates
SBP
target
rate
Frequency of monetary policy
meetings 11/year 4/year 12/year 12/year 6/year 8/year 12/year 6/year
Govt. officials in monetary
policy meetings 1 3 NO 1* 2 NO 1 1
Monetary policy decision
making body
RBA
Board
BB
Board
BoI
Board MPC
Central
Board
Governing
Council
Monetary
Board
Central
Board
Frequency of review/analysis
accompanying monetary
policy
4/year 2/year 6/year 12/year 6/year 4/year 11-
12/year 6/year
Policy reviews issued
during Jan’06 – Sep’15 39 20 76 116 59 39 69 # 48
Average # of words § 2,097 1,098 920 1,610 2,368 716 537 1,356
Average # of sentences § 84 37 41 71 90 30 17 54
Flesch-Kincaid (FK) grade
level ± 13.1 16.7 15.1 14.8 15.2 13.5 15.5 15.3
IT = Inflation Targeting; MT = Monetary Targeting; FIT = Flexible Inflation Targeting; O/N = Overnight; SF = Standing
Facilities; MPC = Monetary Policy Committee; NO= no (government) official.
* with no right to vote ; # during Jan’10 – Sep’15; § Average pertains to opening section of each central bank’s monetary
policy review published during the sample period; ± FK grade level is a readability statistics that shows the number of
years of education needed to sufficiently comprehend a text. In table, the figure pertains to monetary policy text; ** SBP
uses trend and near-term forecasts of inflation as an implicit nominal anchor.
Source: Bank for International Settlements, Central banks’ websites
Table 1 show that all the central banks in our sample use short-term interest rate for implementing the
monetary policy decision. Also, except CBRT, the highest governing body is responsible for
6 The last section is further sub-divided into different macroeconomic themes such as financial markets,
monetary sector, fiscal sector, external sector, economic growth and inflation.
-7-
monetary policy decision in all other central banks.7 Furthermore, Table 1 also report key statistics
related to readability of policy reviews across sample. It appears that RBI is having the longest policy
reviews in the sample with an average 90 sentences per review. In contrast, each CBSL’s policy
review only contains 17 sentences on average. On scale of readability statistics, it is found that the
policy statements of RBA and BoC require on average 13 years of education to comprehend the text,
which is 2.5 years lesser than other banks in the sample.8
Since it is quite a stretch to analyze the full monetary policy reviews of selected sample, for the
objectives of this study, we only focused on the opening section of policy reviews which generally
summarizes the overall macroeconomic conditions systematically. The motivation behind this
selection is that the opening section receives the most media attention due to its brevity along with
policy decision and rationale [Fracasso et. al. (2003)]. Importantly, this section also includes the
outlook and forecasts of important macroeconomic policy indicators (such as of inflation and GDP
growth) up to the horizon of one year ahead.
5. Methodology
Regarding the methodology to conduct the analysis of contents of monetary policy reviews, we
followed the spirit of methodology used by Romer and Romer (1994) and Fernandez (2007). For this
purpose, we employed the text analysis software Qualitative Data Analysis (QDA) 4.0.9 QDA creates
‘characteristic’ classes of topics on their patterns of distribution throughout the text; commonly
termed as corpus in text mining context. The software basically analyzed the ‘active’ topics in the text
and avoids the preposition and other auxiliary words.10
The active words - normally referred as bag-
of-words in text mining literature - are actually the researchers’ coded characteristic categories of
interest.
Specifically, we categorized our coded characteristics into five main macroeconomic themes usually
found in monetary policy reviews (or even in any other central bank’s report on economic analysis).
These themes include trends in inflation and commodity prices, developments in real sector, impact of
external sector and changes in global economy, and trend in fiscal and monetary variables. Moreover,
to refine the search pattern, since real sector is a broad term, we club together the growth-describing
words such as manufacturing, GDP growth, and production using wildcard methods for in-depth text
analysis. Similar procedure is applied in case of other four macroeconomic themes as well.11
To extract the information related to forward-looking contents in monetary policy reviews, however,
we designed and applied different sets of characteristics which are usually found in monetary policy
literature for analyzing futuristic content in the central banking text (see Lucca and Trebbi (2011) and
Campbell et. al. (2012) for details). Basically we attempted to estimate the proportion of discussion in
7 It is to be noted that our sample is up to September 2015 position where as the changes in SBP’s framework
(such as the establishment of MPC) were enacted in November 2015. 8 For this purpose, we used Flesch-Kincaid grade level statistics that shows the number of years of education
needed to sufficiently comprehend a text. It is calculated as 0:39*(# words/# sentences) + 11.8*(# syllables/#
words) – 15.59. The intuition is that many words per sentence or many syllables per word decrease text
readability. It is embedded in new version of Microsoft Word. 9 QDA is developed by a research firm Provalis. Unlike other text analysis softwares, QDA does not depend on
the researcher prejudices concerning the content. In fact, QDA recognizes the characteristic topics and the
researcher then imposes categorical, semanting meaning on them. 10
It is pertinent to mention here that despite the software support, we still spent a substantial amount of time
reading selected monetary policy reviews of central banks in the sample. 11
See Table A.1 and Figure A.1 in appendix for complete list of topics and their respective word clouds across
sample.
-8-
opening section of monetary policy reviews that contain futuristic characteristic topics.12
After
identifying these characteristics, we group them into three broad categories; namely economic outlook
(in narration form), projections and forecasts (in figures), and risks associated to economic outlook.
It is pertinent to mention here that despite the degree of subjectivity in our analysis, the coding is
generally in line with the anecdotal evidences about the macroeconomic conditions in all the selected
countries during the sample period. However, in case of extracting forward-looking content, surely
the subjective approach is not perfect and comes with caveats and biasness. But, unlike algorithm
based coding in linguistic softwares, the hand coding also provides between the line information to a
reader/researcher.
6. Findings and Discussion
Before we dwell into findings and discussion about the objectives of this study, Figure 1 depicts the
trend of wordcount in SBP’s monetary policy reviews and policy variables. It can be observed that,
amid balance of payments crisis in 2008, an obvious effort from SBP could be seen to enhance
communication for calming down the then emerging speculative sentiments in the foreign exchange
market.13
Interestingly, over the period, the trend in word count largely coincides with the underlying
trend in headline CPI inflation (correlation of 0.70) and changes in SBP reverse repo rate. Not
necessarily, but it seems that it’s easy for SBP to communicate when economic conditions and
outlook allows for an ease in monetary policy stance.
Contents of Monetary Policy Analysis and Macroeconomic Conditions
Figure 2 presents the average distribution of selected macroeconomic sectoral contents in the
monetary policy reviews of each central bank in our sample. It appears from the figure that SBP gives
one-fourth of the weight to analysis related to developments in external sector which is followed by
inflation, fiscal, growth and monetary. Being a small open economy, this pattern is anticipated.14
Also,
unlike other central banks in the sample, SBP’s monetary policy reviews stand out in giving more
space to fiscal analysis. Deterioration in fiscal sector (and its skewed reliance on domestic financing)
12
See Table A.2 in appendix for randomly selected statements highlighting the forward-looking contents in
monetary policy reviews. 13
Due to increase in import bill, particularly of oil, pressures in the foreign exchange market increased. SBP lost
around 76 percent of its foreign reserves (around $11.0 billion) in 12 months before signing the IMF program in
November 2008. 14
In the context of emerging economies, emphasis on external sector developments are quite explicable,
particularly in the perspective of ‘fear of floating’ and ‘original sin’ phenomenon [Calvo and Reinhart (2002)
and Eichengreen et. al. (2003)]
0.0%
7.5%
15.0%
22.5%
30.0%
0
500
1000
1500
2000
2500
3000
3500
4000
Jul-05 Jan-09 Sep-10 Apr-12 May-14 Sep-15
no
. of
wo
rds
No. of words in Executive Summary of Statements--------------- in Policy Decisions
CPI Inflation - YoY (rhs)
SBP Reverse Repo Rate (rhs)
Figure 1: SBP’s Monetary Policy Reviews: Word Count and Trends in Inflation and Key Interest Rate
Note: Horizontal axis represents each monetary policy review.
-9-
after 2008 balance of payments crisis perhaps partially explains SBP’s increased focus on fiscal
analysis.
In cross-country comparison, it could be observed that in terms of contents of the monetary policy
reviews, the policy analysis are broadly in line with a specific regime of respective central bank.
Specifically, the inflation targeting central banks gives more attention to inflation (and trend in prices)
than other central banks. Similarly, monetary targeting central banks devote significant space to
analysis related to monetary sector. Interestingly, irrespective of regime (and income classification),
however, the discussion on external sector found to have a significant weight in all the selected central
banks’ monetary policy reviews.
The estimated weights in each sector are also a good reflection of overall macroeconomic conditions
in the sample period.15
For instance, increased focus of monetary policy analysis on external
developments was natural after global commodity prices shock of 2008, particularly the oil price
shock. On the other hand, due to liquidation of Lehman Brothers and the collapse in global housing
markets in late 2008, recessionary tendencies and increase in unemployment led the central banks to
focus more on real sector developments. In recent years, the latter trend is more visible in case of
emerging economies.
Role of Macroeconomic Contents in Driving the Monetary Policy Decisions
While it is interesting to identify the pattern and behavior of macroeconomic textual analysis in
monetary policy reviews, however, the key question from the policy perspective is that which
conditions played an important role in influencing the central bank’s interest rate decision. To answer
this question, we attempted to decompose the information extracted from the previous section into
major and minor driving factors. The intuition behind this dissection is simple, i.e., the more the
emphasis of central bank analysis on particular sector, the greater will be its influence in driving the
policy decision. Based on this reasoning, Figure 3 presents the heat map of selected sample depicting
the major and minor driving factors along with trend in main policy interest rate.
As highlighted earlier, Figure 3 further reinforce the fact that unlike other central banks, trend in fiscal
variables on average play an important role in decision making process of SBP. Broadly, across the
sample, developments in inflation and external sector play a leading role in driving the monetary
policy stance. However, a close inspection also suggest that after the financial crisis of 2008, there is
15
See Figure A.2 in appendix for over time changes in discussion on macroeconomic sectoral contents in policy
reviews.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Turkey
Canada
Australia
Indonesia
India
Pakistan
Sri Lanka
Bangladesh
Inflation Real External Fiscal Monetary
Figure 2: Cross-country: Discussion Related to Selected Macroeconomic Indicators in Monetary Policy Reviews
(during January 2006 to September 2015)
-10-
an apparent shift in increased policy analysis of inflation targeting central banks towards real sector.
In fact, with lower levels of inflation worldwide and sluggish recovery in domestic demand, this
pattern seems to be found in most of the central banks’ analysis around the world.
Figure 3: Heat Map: Macroeconomic Drivers of Monetary Stance based on Monetary Policy Reviews
(during January 2006 to September 2015)
State Bank of Pakistan Bangladesh Bank
Reserve Bank of India Bank Indonesia
Central Bank of Sri Lanka Central Bank of the Republic of Turkey
Reserve Bank of Australia Bank of Canada
Note: Horizontal axis represents each monetary policy review. Instead of policy rate, y-o-y broad money growth is used in case of Bangladesh.
5.5%7.0%8.5%10.0%11.5%13.0%14.5%16.0%
Jan
-06
Jan
-08
Jan
-09
No
v-0
9
May
-10
Jan
-11
Oct-
11
Jun
-12
Dec-1
2
Sep
-13
May
-14
Jan
-15
Sep
-15
major ↑
driving factors
↓minor
Inflation Real External Fiscal Monetary Policy Rate (rhs)
5.5%
7.0%
8.5%
10.0%
11.5%
13.0%
14.5%
16.0%
Jan
-06
Jan
-08
Jan
-09
No
v-0
9
May
-10
Jan
-11
Oct
-11
Jun
-12
Dec
-12
Sep
-13
May
-14
Jan
-15
Sep
-15
major ↑
driving
factors ↓
minor
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jul-
13
Jul-
14
Jul-
15
major ↑
driving
factors ↓
minor
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Jan
-06
Ap
r-0
7
Jul-
08
Oct
-09
No
v-1
0
Jun
-11
Jan
-12
Sep
-12
May
-13
Dec
-13
Au
g-1
4
Feb
-15
Sep
-15
major ↑
driving
factors ↓
minor
4.5%
6.0%
7.5%
9.0%
10.5%
12.0%
13.5%
Feb
-06
Dec
-06
Sep
-07
Au
g-0
8
May
-09
Feb
-10
No
v-1
0
Au
g-1
1
Mar
-12
No
v-1
2
Jun
-13
Mar
-14
Dec
-14
Sep
-15
major ↑
driving
factors ↓
minor
5.5%
5.9%
6.3%
6.7%
7.1%
7.5%
7.9%
Jan
-10
Jun
-10
No
v-1
0M
ar-1
1Ju
l-1
1
Dec
-11
May
-12
Oct
-12
Mar
-13
Au
g-1
3
Jan
-14
Jun
-14
No
v-1
4
Ap
r-1
5
Sep
-15
major ↑
driving
factors ↓
minor
5.0%
8.5%
12.0%
15.5%
19.0%
22.5%
26.0%
Jan
-06
Oct
-06
Jul-
07
Ap
r-0
8
Jan
-09
Oct
-09
Jul-
10
Ap
r-1
1
Jan
-12
Oct
-12
Jul-
13
May
-14
Dec
-14
Sep
-15
major ↑
driving
factors ↓
minor
0.0%
1.5%
3.0%
4.5%
6.0%
7.5%
9.0%
Feb
-06
Feb
-07
Feb
-08
Feb
-09
Feb
-10
Feb
-11
Feb
-12
No
v-1
2
Au
g-1
3
Au
g-1
4
Au
g-1
5
major ↑
driving
factors ↓
minor
0.0%
0.8%
1.6%
2.4%
3.2%
4.0%
4.8%
5.6%
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Oct
-10
Jul-
11
Jul-
12
Jul-
13
Jul-
14
Jul-
15
major ↑
driving
factors ↓
minor
-11-
Furthermore, Table 2 reports that the findings highlighted above are also found to be significant by
performing simple regression analysis for each central bank in the sample.16
For instance, in case of
SBP, it is found that on average 1 percentage point increase in inflation analysis (from its sample
average) is associated with an increase in SBP policy rate by 50 basis points. In case of inflation
targeting central bank such as CBRT, however, this relationship is relatively strong.
Forward-looking Contents in the Monetary Policy Reviews
Figure 4 shows that, in case of SBP, on average forward-looking content represent only 10 percent of
discussion in monetary policy reviews. In other words, 90 percent of discussions contain backward-
looking analysis. Also, it appears that the forward-looking contents tend to discuss economic outlook
more in a descriptive manner (i.e. explaining the 80 percent of total forward-looking contents). The
proportion of providing numerical projections or forecasts along with risks and uncertainties is very
low. This pattern of analyzing economic outlook is understandable given the fact that Pakistan is
having a developing financial system that leads to distortions in monetary transmission mechanism
and cause weak relationship between the central bank’s policy tools and objectives.17
16
Since Bangladesh Bank is not using interest rate as an instrument of monetary policy, it is excluded from
regression analysis. 17
See Choudhri et. al. (2015) for recent empirical results about the effectiveness of monetary policy in Pakistan.
Table 2: Regression Analysis: Macroeconomic Contents as driver of Monetary Policy Decisions
(dependent variable is first difference of each central bank’s key policy interest rate, during 2006-2014)
Constant Inflation Real External Fiscal Monetary Obs. Adj. R2
Regional/Emerging Economies
SBP -0.011 * 0.052 * 0.046 ** 0.057 * 0.056 ** 0.015 * 48 0.43
RBI 0.004 * 0.051 ** 0.053 ** 0.055 * 0.038 * 0.032 * 59 0.37
BoI -0.021 ** 0.032 * 0.018 0.048 *** 0.014 * 0.019 ** 76 0.58
CBRT 0.057 ** 0.076 *** 0.048 ** 0.060 * 0.021 * -0.002 116 0.52
CBSL 0.022 * 0.026 ** 0.019 * 0.037 ** 0.028 * 0.039 ** 69 0.61
Advanced Economies
RBA 0.008 ** 0.061 ** 0.003 0.038 *** 0.021 ** 0.009 * 39 0.43
BoC 0.016 * 0.054 * 0.023 ** 0.032 ** 0.013 *** 0.011 ** 39 0.33
Note: *, ** and *** denote statistical significance at 10, 5 and 1 percent (level of significance) respectively.
Also, each coefficient value represents an average deviation from mean weighted discussion due to increase (decrease) in
policy rate by central bank during the sample period.
0% 25% 50% 75% 100%
BoC
RBA
BoI
CBRT
RBI
SBP
CBSL
BB
Economy outlook (narration form) Risks and uncertainties
Forecasts and projections
contribution of forward looking content (in total)
0%
10%
20%
30%
40%
50%
60%
BB
SB
P
CB
SL
RB
I
CB
RT
Bo
I
Bo
C
RB
A
Figure 4: Forward-looking Content in the Monetary Policy Reviews
-12-
Under the cross-country analysis, it is found that the non-inflation targeting central banks - which
includes South Asian economies in the sample - generally rely on back-ward looking analysis as the
forward-looking information makes only 10 percent of total discussion in their policy reviews. Also,
similar to SBP, its other South Asian counterparts tend to focus more on economic outlook in a
descriptive way instead of sharing quantitative forecasts about policy variables. This lack of
transparency partially explains the lower ranking of the central banks of South Asian economies
according to Dincer and Eichengreen (2014) transparency index.
In contrast, it is found that forward-looking content makes on average three times more in case of
monetary policy analysis of inflation targeting central banks. These central banks are also found to be
more transparent in providing the numerical projections or forecasts about important macro-indicators
in their policy reviews. For instance, RBA is found to have more than half of its monetary policy
analysis discussing the futuristic contents; of which, one-third is in the form of projections/forecasts
along with risks and uncertainties.
How Predictive are these Forward-looking Contents?
How well these extracted forward-looking contents are useful to explain the future changes in central
bank’s interest rate decisions? To measure this aspect in our sample, we construct the communication
indices (CIs) for each central bank based on statements related to price stability and inflation. We only
focused on arguments related to price stability and inflation due to the fact that most of the central
banks – whether targeting inflation or not – gives significant weight to price stability or trends in
inflation while making policy decisions.18
Specifically, we are dissecting the forward-looking
statements about inflation and price stability into hawkish, neutral and dovish categories with +1, 0
and -1 codes, respectively. Based on this coding scheme, Figure 5 plots the cross-correlations between
estimated/resultant communication indices (CIs) and main policy rates of central banks in our sample.
Figure 5 shows that despite the slight variations among the trends, broadly the CI is found to have
leading indicator qualities and could explain the future changes in policy rate in each case. This
outcome is bit intuitive as the CIs contain mainly forward-looking information. It could be observed
from Figure 5 that based on frequency of monetary policy reviews, the highest cross-correlation
between CI and policy rate mostly seen at 3 to 9 month horizon in each case. For instance, in case of
SBP, the highest correlation stands at 0.40 after two scheduled monetary policy reviews (which is
equal to 4 months).
Compared to other central banks in the sample, however, on average SBP is found to have lesser
predictive powers to guide future changes in policy rate. For example, in case of RBI, correlation peak
to 0.55 when the CI precedes the policy rate by 2 quarters. Similar results are found for inflation
targeting central banks, but with significant higher correlation at longer horizons. To further
empirically investigate the leading properties of constructed CIs and their role in central bank’s
communication; we applied the Structural Vector Autoregression (SVAR) model for period from
January 2006 to September 2015.
The SVAR model consists of three variables; year-on-year change in headline inflation (measured by
consumer price index), central bank’s main policy interest rate and CI for each central bank in the
18
See useful survey by Jeanneau (2009) for further details.
-13-
sample.19
The recursive structure of the VAR assumes that (i) inflation responds with a lag to
innovations in policy rate, and (ii) policy rate does not respond to change in CI in the same period.
Specifically;
Where is the headline inflation, is the main policy interest rate of central bank, is the
constructed communication index for each central bank, is the conditional expectations operator
and is the impulse response coefficients. Choice of the lag is based on the Akaike information
criterion (AIC). Equation (1) presents the structural form of the VAR model as follows;
19
Due to data limitations, we excluded Bangladesh Bank and CBSL from estimations. For RBI model, we used
wholesale price index (WPI) instead of consumer price index (CPI).
Figure 5: Cross-correlations between Communication Indices (CI) and Policy Rates
(during January 2006 to September 2015)
State Bank of Pakistan Reserve Bank of India
Central Bank of the Republic of Turkey Bank Indonesia
Reserve Bank of Australia Bank of Canada
Note: Horizontal axis represents interval between two sequential monetary policy reviews in each case. The red bar indicates the 12 month horizon based on frequency of monetary policy reviews.
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6
-14-
(1)
Where = [headline inflation, policy interest rate, CI],
= ( , and
Figure 6 presents the impulse responses of headline inflation and policy rate across the sample to one
standard deviation (SD) shock in innovation of communication index variable. Positive innovation in
index reflects the hawkish or tightening effect of monetary stance on variables of our interest. Both
headline inflation and policy rate responses show a percentage point deviations from the baseline. The
results show that, broadly across the sample, a unit SD shock to communication index explains the
developments in headline inflation and policy rate up to one year horizon.
Figure 6: Impulse Responses in the Structural VAR Model
(during January 2006 to September 2015; response is based on structural 1 SD shock to communication index)
State Bank of Pakistan Reserve Bank of India
Central Bank of the Republic of Turkey Bank Indonesia
Reserve Bank of Australia Bank of Canada
Note: Horizontal axis represents interval between two sequential monetary policy reviews in each case. The black marker indicates the 12
month horizon based on frequency of monetary policy reviews.
-0.10
-0.04
0.02
0.08
0.14
0.20
0.26
0.32
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-0.23
-0.15
-0.08
0.00
0.08
0.15
0.23
0.30
1 2 3 4 5 6 7 8 9 10 11 12 13 14
0.00
0.03
0.05
0.08
0.10
0.13
0.15
0.18
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-0.06
-0.03
0.00
0.03
0.06
0.10
0.13
0.16
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-0.06
-0.03
0.00
0.03
0.06
0.10
0.13
0.16
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-0.17
-0.13
-0.10
-0.06
-0.03
0.01
0.05
0.08
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-15-
Specifically, the results in Figure 6 indicates that in case of SBP, a positive 1 SD shock to CI first
leads to an increase in CPI inflation by 0.25 percentage points up to 6 months before it is starts to fall;
a phenomenon generally known as prize puzzle.20
The response of SBP policy rate appears to be bit
lagging as it is showing an increase after two months with a peak of 14 basis points (or 0.14
percentage points) and remain positive up to 14 months. Furthermore, the results for RBI also
suggests the presence of prize puzzle as WPI inflation shows an increase up to two quarters after
monetary tightening. However, unlike SBP, the RBI appears to be more preemptive in case of
adjusting its policy stance to control any increase in inflationary pressures.21
Except for BoC, the above results are also found in case of other Banks in the sample, particularly
those following the inflation targeting regime. Amongst the latter group, RBA appears to be more
belligerent in controlling the inflation than CBRT and BoI. On the other hand, different behavior of
BoC might suggest to the fact that in response to emergence of financial crisis, BoC sharply reduced
its policy rate from 4.75 percent to 0.50 percent in late 2008. At that time, Canadian government had
also announced the fiscal stimulus package to avoid economic recession. Although these measures
were supposed to boost the aggregate demand, the economy however faced brief episodes of deflation
after the crisis which forced the BoC to still hold its policy rate at 0.50 percent.
7. Conclusion
This paper presented a textual analysis of SBP’s monetary policy reviews conducted during the past
decade and compared them with the policy reviews of RBI, CBSL, BB, BoI, CBRT, BoC and RBA.
Our sample provided a good mix of regional, emerging and developed economies with different
policy regimes as well. Using text analytics softwares and empirical estimations, we applied both the
quantitative and qualitative approaches for the content analysis of monetary policy reviews.
Our results show that the contents of monetary policy analysis are largely a reflection of particular
regime adopted by the respective central bank. Also, across the sample, most of the monetary policy
decisions are found to be driven by trends in inflation and developments in external sector. And,
central banks which are following the inflation targeting regime have more forward-looking content in
their policy reviews than non-inflation targeters. The former banks are also found to have better
tendency to explain the future changes in policy rates and more proactive in tackling the rise in
inflationary pressures.
Particularly in case of SBP, although the monetary policy analysis and its contents have shown
gradual improvement, but compared to central banks of regional and emerging economies, empirical
results suggest that there is still a much room for improvement in SBP’s monetary policy analysis and
its communication. It is also necessary for better management of expectations of stakeholders and to
enhance the effectiveness of monetary policy transmission.
20
For more details on prize puzzle, see Eichenbaum (1992). Also, this result is in line with Javid and Munir
(2010) findings for monetary policy transmission mechanism in Pakistan. 21
Though it requires proper empirical testing, but this lagging behavior of SBP could potentially imparting the
confusion among the financial market participants about the bank’s monetary policy strategy. In fact, this
behavior is reflected in Bloomberg survey which is normally conducted before each monetary policy review.
Figure A.3 in appendix shows that, across the selected sample, on average the number of surprises are found to
be highest in case of SBP when financial market participants try to predict the interest rate decision.
-16-
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Appendix
Table A1: Word Lists Across Monetary Policy Reviews in Sample for Textual Analysis
Inflation related Growth related External related Fiscal related Monetary related
inflation* manufacture* global* fiscal* credit*
price* product* external* budget* broad money
price stability investment* current account government borro* money supply
CPI* (or WPI in case
of India) GDP growth capital flows tax* monetar*
economic growth capital inflows expenditur*
domestic demand foreign inflows
foreign flows
financial account
trade
export*
import*
reserves
exchange rate
appreciat*
depreciat*
Note: * denotes a wildcard allowing for stemming words such as ‘inflationary pressure’
-19-
Table A2: Selected Statements Showing Forward-looking Elements in Monetary Policy Reviews in Sample
Central Bank Example 1 Example 2
State Bank of
Pakistan
“In March 2012 the year-on-year CPI inflation was
10.8 percent and, given the current economic
conditions, is projected to remain in double digits
during FY13.” [Apr 2009]
“Thus, there is no change in SBP's forecast of
average CPI inflation for FY16 with its range of
4.5-5.5 percent remaining below the annual plan
target of 6 percent.” [Sep 2015]
Bangladesh Bank
“Following some government measures, growth in
agriculture is expected to be higher than the
previous year.” [Jul 2007]
“.....inflationary pressures over the past few months
with the risks ahead related to the inflation outlook
imply that achieving the FY15 inflation target will
be challenging.” [Jul 2014]
Reserve Bank of
India
“Essentially, inflation rates have reached a plateau,
but are likely to remain at unacceptably high levels
for some months.” [Oct 2011]
“The outlook for food inflation could improve if
the increase in sown area translates into higher
production.” [Sep 2015]
Bank Indonesia
“This measure is expected to deliver a boost to the
domestic economy that will prevent steeper
decline.” [Feb 2009]
“In 2015, stronger economic growth is forecasted,
namely in the 5.4-5.8% range.” [Jan 2015]
Central Bank of Sri
Lanka
“As a result, inflation is projected to moderate
from March 2013 and reach mid-single digit
levels thereafter.” [Jan 2013]
“.....will continue to be vigilant on the overall
trends in the growth of credit as well as
monetary aggregates and take preemptive
measures in the case of emerging risks threatening
the maintenance of price stability on a sustainable
basis.” [Sep 2015]
Central Bank of the
Republic of Turkey
“Short-term forecasts made in the light of these
evaluations indicate that annual inflation will
slightly increase in the first quarter of 2006, but
decline again starting from the second quarter
onwards.” [Jan 2006]
“This development in the exchange rates is
assessed to contribute favorably to the inflation
outlook.” [May 2014]
Reserve Bank of
Australia
“On this basis, while inflation is likely to remain
high in the short term, it is forecast to start to
decline towards the end of 2008, reaching a rate of
around 2¾ per cent at the end of the forecast
period.” [May 2008]
“…..inflation is projected to be consistent with the
target over the forecast period.” [Aug 2014]
Bank of Canada
“…..strength of the Canadian dollar, Canada's poor
relative productivity performance, and the low
absolute level of U.S. demand will continue to act
as significant drags on economic activity in
Canada.” [Apr 2010]
“Prices are currently lower but our belief is that
prices over the medium term are likely to be
higher.” [Jan 2015]
Source: Central banks’ websites
-20-
Figure a1: Word Clouds of Macroeconomic Topics in Monetary Policy Reviews across Sample
(based on word list in Table A.1)
State Bank of Pakistan Bangladesh Bank
Reserve Bank of India Bank Indonesia
Central Bank of Sri Lanka Central Bank of the Republic of Turkey
Reserve Bank of Australia Bank of Canada
Note: Size of words reflects their respective weighted frequency in Monetary Policy Reviews across the sample.
-21-
Figure a2: Overtime Contribution of Sectoral-discussion in Monetary Policy Reviews
(during January 2006 to September 2015)
State Bank of Pakistan Bangladesh Bank
Reserve Bank of India Bank Indonesia
Central Bank of Sri Lanka Central Bank of the Republic of Turkey
Reserve Bank of Australia Bank of Canada
Note: Horizontal axis represents each monetary policy review.
0%10%20%30%40%50%60%70%80%90%
100%Ju
l-05
Jul-
07
Nov
-08
Sep
-09
Mar
-10
Nov
-10
Jul-
11
Apr
-12
Dec
-12
Sep
-13
Inflation Real External Fiscal Monetary
0%
20%
40%
60%
80%
100%
Jan
-06
Jan
-08
Jan
-09
No
v-0
9
Jul-
10
Mar
-11
No
v-1
1
Au
g-1
2
Feb
-13
No
v-1
3
May
-14
Jan
-15
Sep
-15
0%
20%
40%
60%
80%
100%
Jan
-06
Jul-
07
Jan
-09
Jul-
10
Jan
-12
Jan
-14
Jul-
15
0%
20%
40%
60%
80%
100%
Jan
-06
Ap
r-0
7
Jul-
08
Oct
-09
Sep
-10
Mar
-11
Oct
-11
Jun-1
2
Jan
-13
Sep
-13
Jun-1
4
Feb
-15
Sep
-15
0%
20%
40%
60%
80%
100%
Feb
-06
Sep
-06
Jun
-07
Mar
-08
No
v-0
8
Jun
-09
Feb
-10
Sep
-10
May
-11
Jan
-12
Au
g-1
2
Mar
-13
No
v-1
3
Jun
-14
Jan
-15
Sep
-15
0%
20%
40%
60%
80%
100%
Jan
-10
Jun
-10
No
v-1
0
Ap
r-1
1
Oct
-11
Mar
-12
Au
g-1
2
Jan
-13
May
-13
No
v-1
3
May
-14
Oct
-14
Ap
r-1
5
Sep
-15
0%
20%
40%
60%
80%
100%
Jan
-06
Sep
-06
Ap
r-0
7
No
v-0
7
Jun
-08
Feb
-09
Sep
-09
Ap
r-1
0
No
v-1
0
Jun
-11
Jan
-12
Au
g-1
2
Mar
-13
Oct
-13
Jul-
14
Feb
-15
Sep
-15
0%
20%
40%
60%
80%
100%
Feb
-06
Feb
-07
Feb
-08
Feb
-09
Feb
-10
Feb
-11
Feb
-12
No
v-1
2
No
v-1
3
Au
g-1
4
Au
g-1
5
0%
20%
40%
60%
80%
100%
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Oct
-09
Oct
-10
Oct
-11
Jul-
12
Jul-
13
Jul-
14
Jul-
15
-22-
0 5 10 15 20 25 30 35 40
Pakistan
Sri Lanka
India
Indonesia
Turkey
Australia
Canada
as % of all monetary policy decisions
Over-predicted Under-predicted
Figure a3: Policy Surprises for Financial Market Participants
(based on Bloomberg survey for changes in policy rate, during January 2006 to September 2015)
Source: Bloomberg, authors’ calculations